Made-in-America Gets Better as Price Drives Better Sales

Sales soared by as much as 25 percent at Gordon Stewart’s four Chevrolet stores in 2013, the fourth straight year of rising U.S. auto sales, and he said he’s never had a better lineup from General Motors Co. (GM) His best market will come when he no longer has to persuade car buyers to pay up for models such as the shark-nosed Chevy Impala.

“That new Impala has got to be the nicest car on the market, but the customers haven’t adjusted to the pricing,” said Stewart, who pointed out a fully loaded Impala that used to sell for under $25,000 now goes for $40,000. “If that car were $30,000, it would be selling like popcorn.”

Graphic: Auto Sales Increase in 2013 as Detroit 3 Gain Market Share

That is the challenge for remade American automakers in 2014: They are fielding their best cars in a generation while they are saddled with an image for building poor-quality models. To dealers like Stewart, the solution is simple -- cut prices. Yet GM, Ford Motor Co. (F) and Chrysler Group LLC (CGC) have promised not to sacrifice their growing profitability by falling into old habits of deep discounting.

This year, though, the Detroit Three and their retailers may meet in the middle, which could propel U.S. auto sales to what some analysts forecast to be the highest level since 2006. The North American auto industry is expanding factory capacity by about 3 million vehicles from its 2009 low, and new model introductions will more than double this year, according to researcher IHS Automotive. The combination of added capacity and competition will put pressure on prices.

Photographer: Jonathan Alcorn/Bloomberg

A General Motors Co. Chevrolet Z71 Colorado truck during the LA Auto Show in California. Close

A General Motors Co. Chevrolet Z71 Colorado truck during the LA Auto Show in California.

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Photographer: Jonathan Alcorn/Bloomberg

A General Motors Co. Chevrolet Z71 Colorado truck during the LA Auto Show in California.

‘Banner Year’

“We are expecting pricing to kind of melt to achieve 16.5 million” auto sales this year, up from 15.6 million in 2013, said Adam Jonas, an auto analyst with Morgan Stanley. “We think we’re peaking. It should be a banner year.”

The combined U.S. market share for GM, Ford and Chrysler rose to 45.3 percent last year, up from 44.8 percent in 2012, the third time in the last four years they’ve gained ground. Industrywide, U.S. sales rose 7.6 percent to 15.6 million, according to researcher Autodata Corp. That was the highest since 2007, when automakers sold 16.15 million cars and trucks in the U.S.

An otherwise strong year petered to a slow finish, as December sales rose just 0.3 percent, suggesting that automakers are still challenged to convince reluctant consumers to part with their money for such a big-ticket purchase. Automakers may now need to offer a few more discounts even as they field new models to generate showroom traffic, Jonas said.

Photographer: Daniel Acker/Bloomberg

The combined U.S. market share for GM, Ford and Chrysler rose to 45.3 percent last year, up from 44.8 percent in 2012, the third time in the last four years they’ve gained ground. Close

The combined U.S. market share for GM, Ford and Chrysler rose to 45.3 percent last... Read More

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Photographer: Daniel Acker/Bloomberg

The combined U.S. market share for GM, Ford and Chrysler rose to 45.3 percent last year, up from 44.8 percent in 2012, the third time in the last four years they’ve gained ground.

“It’s a hugely competitive market,” said Stephanie Brinley, an analyst with IHS Automotive. “We’ve got 37 new products coming this year, up from 16 last year.”

Attractive Prices

Detroit Sinks as Auto Industry Soars

New models such as redesigns of the Ford Mustang, Ford F-150 pickup, Chevy Tahoe and Chrysler 200 sedan will attract more tire-kickers to showrooms in 2014. And they will find more attractive prices because of growing competition from Japanese automakers such Toyota Motor Corp. (7203) that have more flexibility to cut prices while preserving profits because of the weakened yen, Jonas said.

“Detroit has good, fresh product, fuel prices are low, which favors the domestics, and the product segments that are more popular right now favor the Detroit guys,” Jonas said. “And while the Japanese have turned the corner on improved styling and technology, they’re still behind.”

Fielding attractive cars such as Ford’s Fusion family car has freed the Detroit Three from the longtime bind of choosing between boosting sales with big price cuts or charging enough to earn a profit.

“If I was a dealer, I’d rather have the problem where people get in the car and see the quality and design has improved, as opposed to selling $25,000 Impalas at no margin,” said Kevin Tynan, Bloomberg Industries auto analyst. Changing the image of Detroit cars “certainly is not going to happen in a model year. It might take a generation.”

GM Transformation

Some change is already taking place. GM is reaping the benefits of 18 new or refreshed vehicles introduced in the U.S. last year and 14 more coming this year.

“All of this new product is going to flow into a market that has plenty of room to grow,” Kurt McNeil, GM vice president of U.S. sales operations, said in a Jan. 3 conference call with analysts and reporters. “Things continue to fall into place from an economic standpoint, especially in the last month or two.”

This year, five analysts, including Jonas and LMC Automotive’s Jeff Schuster, predict auto sales will be the highest since 2006, when industrywide car and truck deliveries reached 16.6 million. The all-time high was 17.4 million in 2000.

The difference for Detroit: The U.S. automakers now make money at much lower sales volumes, thanks to the debt-cleansing bankruptcies at GM and Chrysler in 2009 and Ford’s self-financed reorganization, which reduced workers, factories and cut labor costs.

‘Heavy Incentives’

Before the recession of 2009, U.S. automakers achieved high sales “only by way of very heavy incentives to get people to buy cars,” John Casesa, senior managing director at Guggenheim Partners LLC, said Jan. 3 on Bloomberg Radio. “Today incentives are much lower, the industry has cut capacity and we’re selling 16 million units at very profitable prices. So we’ve got a much healthier industry.”

Models such as Ford’s Fusion, with sales up 22 percent last year, demonstrate Detroit now devotes as much design and engineering resources to cars as it does to sport-utility vehicles and pickups, said Schuster of LMC Automotive.

“The Fusion just struck a chord with consumers,” Schuster said. “It speaks to the increased competitiveness of Ford and really all of Detroit. The challenge is to continue that momentum.”

Next Moves

The automakers will get a chance to display what’s next at the Detroit auto show next week. The unveiling of Ford’s redesigned F-150 pickup is among the most anticipated introductions because the automaker engineered it with a light-weight aluminum body to improve fuel economy.

“All eyes are on the F-150,” said Mark Wakefield, a director in the Detroit office of consultant AlixPartners. “Everyone in the industry is moving to more aluminum. People are already behaving in their product planning as if the F-150 is a success.”

First, the automaker has to convince truck buyers to accept aluminum, after years of marketing “Ford Tough” trucks made of steel, Brinley said.

“Teaching the consumer to trust it may be a bit of a leap,” Brinley said. “It may take some education to prove that the truck will do everything they need it to do.”

Chrysler also has some convincing to do when it unveils its 200 sedan, made famous by hometown rapper Eminem in a 2011 Super Bowl commercial. Sales of the sedan dropped 38 percent in December and fell 2 percent for the full year. The Fusion outsold the 200 last year by more than two-to-one.

Struggling 200

“Chrysler needs to be in the car game,” Brinley said. “The current 200 is struggling and the new one needs to be a beautiful car that consumers want to buy.”

Chrysler is getting the most buzz for its New Year’s Day news that it is being fully purchased by Fiat SpA (F) after being controlled by the Italian automaker since emerging from bankruptcy in June 2009. The move will enable Chrysler to focus more on building and selling cars without uncertainty over its ownership situation, Wakefield said.

“These guys have been living together for five years. It’s about time they got married,” Wakefield said. “They’re excited to do this.”

Chevy dealer Stewart is hoping car buyers will get more excited about his sharp new Impala, as well as the other new models GM is rolling into his showrooms in Michigan, Georgia and Florida, where he said sales rose from 18 to 25 percent in 2013. That’s going to take a little marketing help and maybe some discounts from Detroit, he said.

“We have a better car now in the new Impala than that $29,000 Mercedes. But how do you get the customer to believe that?” Stewart said. “That’s what we’re fighting. We have the old image to counter and we need to work hard on that.”

To contact the reporter on this story: Keith Naughton in Southfield, Michigan, at knaughton3@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net

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